The Wealth Planning Trifecta: Your Questions Answered

Pam Lucina, President of the Northern Trust Institute
Paul S. Lee, Chief Tax Strategist, Northern Trust

Now is the time to revisit your wealth plan to prepare for an uncertain future.

We find ourselves in a unique environment for wealth planning. The confluence of record-low interest rates, high exemption amounts and an uncertain future for tax policy makes it an important time to revisit your wealth plan. In our new paper The Wealth Planning Trifecta (available for download via the link below), we answer client questions on how to take advantage of this window of opportunity and prepare your wealth plan for an uncertain future.

Record Low Rates

Families who intend to transfer significant wealth to future generations should consider employing techniques that are especially effective in this historically low interest rate environment, including grantor retained annuity trusts (GRATs) and intra-family loans.

Questions we answer:

Why do low interest rates make tax-driven gifting strategies such as GRATs more compelling?
What is on the horizon for these types of techniques, and are they here to stay?
How do loans to family members take advantage of historically low interest rates?

High Exemption Amounts

The Tax Cuts and Jobs Act of 2017 (TCJA) doubled the lifetime gift and estate tax exemption amount from $5 million to $10 million, adjusted for inflation ($11.7 million for individuals and $23.4 million for married U.S. couples in 2021). These provisions are scheduled to sunset on December 31, 2025. As a result, the federal estate tax exemption amount will be reduced back to $5 million (indexed for inflation) after 2025. It is also possible that new tax legislation could be enacted to lower exemption amounts earlier than the scheduled sunset.

Questions we answer:

What are the estate tax implications of not making a gift of the full exemption amount until after it is reduced?
What are the estate tax implications of making a gift in 2021 using the full estate tax exemption amount ($11.7 million) and subsequently having the exemption reduced by half? Is there a possibility of being taxed retroactively?

Uncertain Tax Policy Future

There are a number of key factors pointing toward future tax uncertainty. First, the Democratic wins in both Georgia Senate runoffs resulted in a “unified” Democratic government, significantly increasing the chances that elements of President Biden’s tax proposals could be passed. Second, and of concern to many, the slight risk of tax policy being applied “retroactively.” Third, current levels of deficit spending could require higher tax revenues. Finally, all of the current provisions of the TCJA relevant to individuals and estates remain on track to expire by 2025, regardless.

Questions we answer:

How is tax policy likely to change under the Biden administration?
How does the above impact tax planning opportunities for individuals?
Is retroactive tax legislation possible? Are there steps I can take to prepare?
Why does tax law uncertainty make “flexible trusts” advisable? What types of provisions make a trust flexible?

A WINDOW OF OPPORTUNITY